Women's Start-Ups Lack Access to Venture Capital

When Alexa von Tobel found herself frustrated with the lack of personal finance resources and tools available to her, she took a formal leave of absence from Harvard Business School in 2008 to pursue her dream of creating a way for women to gain control of their finances.

Alexa von Tobel, CEO and Founder of LearnVest

"When I was raising money, it was the heart of the recession,” von Tobel recalls. “It took a lot of time finding people who wanted to invest...ultimately we succeeded, but it felt like a lot of failure when people said, 'Come back when you make 'XYZ' progress.'"

Ultimately, von Tobel founded LearnVest.com, a startup company that offers personal finance advice to women. In 2009, she raised $1.1 million in seed funding from angel investors. Then in July 2011, after a Series A round of $4.5 million funding, she went on to close a $19 million Series B round of funding with participation from Accel Partners— one of the venture capital firms invested in Facebook.

With stories like von Tobel’s, it’s easy to say that women have broken through the proverbial glass ceiling. Yet von Tobel is something of an anomaly, say experts. In general, "they seem to encounter ‘glass walls’ that keep them from venturing out of big companies or structured academic settings to launch their own firms at the same rate men do,” says Lesa Mitchell, a vice president with the Ewing Marion Kauffman Foundationdevoted to entrepreneurship.

In an attempt to crack the glass ceiling in start-ups, a number of mentoring and investing organizations have started or grown significantly over the past few years, such as Women 2.0, SpringBoard Enterprises, Astia, and Golden Seeds. The percentage of women among start-up capital seekers grew to about 20 percent last year, up from 12.6 percent in 2000, according to the University of New Hampshire's Center for Venture Research. Of those women, the number who received funding grew to 13 percent in 2010, up from 9.5 percent in 2008.

"When I was selected to be part of this group [Astia], it gave me the confidence to know that I was ready to 'take the leap' to start LearnVest,” says von Tobel, today the CEO of LearnVest.com.

Women-owned businesses in the female-focused realm is far from new. While there are several women — including Amanda Steinberg, founder of DailyWorth, and Caterina Fake, co-founder or Flickr— who have launched their own start-ups and received venture capital, research suggests that women’s access to, and use of, capital to fund their business dreams lag in comparison to men.

Of the U.S.-based companies that received a round of venture capital financing in 2010, only 6 percent had a female CEO, 7 percent had a female founder, and 10 percent had a female founder or CEO at some point, according to Dow Jones VentureSource.

"Women are founding companies at a very significant pace today, but they're still relatively smaller numbers focusing on high growth venture-backable businesses," says Cindy Padnos, managing director of Illuminate Ventures. But Padnos says that for entrepreneurs who are looking to build scalable, high-return startups, the lack of venture capital funding is problematic, as early stage capital is often critical to keep young companies alive.

What holds women back?

"Historically, venture capital has been the much-acclaimed boys’ club," says Mark G. Heesen, president of the National Venture Capital Association. "That network is something women have to permeate. It's harder for women to break into that arena."

Sue Siegel, a venture capitalist at Mohr Davidow, identifies one significant part of the problem as "the law of numbers." There were 265,400 angel investors in 2010, and they put $20.1 billion in 61,900 entrepreneurial ventures in the U.S., the Center for Venture Research said. Women represented about 13 percent of angel investors, and female entrepreneurs accounted for 21 percent of those seeking angel capital.

"There are more men out there trying to raise funds than women," Siegel says. "Women are good at one-on-one... And you see that unless they find a specific partner there is an intimidation factor... More women are going to angels first than coming to venture capitalists."

Another reason women don't obtain the funding they need for their businesses is because they don't understand the process — which often means "they simply don't ask," says Mitchell. The Center for Women's Business Research noted in 2009 that nearly half of women business owners did not seek moneyfor their businesses. From this finding, the Center concluded there is a need for new thinking and programming to support women who seek to grow their businesses.

"Women tend to use much more traditional channels when starting their own company. They will market a product and try to find someone who can license it or engage a partner,” Siegel says.

Amy Millman, co-founder and president of Washington-based Springboard Enterprises, which connects women entrepreneurs with investors says, "Investors, like bankers, pretty much invest in what they know, something that they understand or that is clear to them."

Millman's company has helped 445 female-led companies connect with angel, venture and corporate investors to raise about $5.5 billion in equity financing over the last 11 years. She says there are substantial differences in the way female and male venture capitalists ask for money. "They [women] don't speak ‘investor.’ They know how to present in a certain way, but its not hitting the points that the investors want to hear."

Siegel adds that while many male entrepreneurs start businesses in areas they know they can make money, women usually start a business in an area where they have a passion. In addition, she says, many male and female entrepreneurs have different notions of failure.

"The male entrepreneurs embrace, but females are somewhat careful and shameful,” Siegel says. “Failure, culturally, is not embedded in women.”

Photo:Julio Gaggia

Natalie Zfat

One of the major barriers for women CEOs of startups is a lack of access to the networks that lead to funding, says Natalie Zfat, founder of Poison Ivy, an entertainment blog in the New York entertainment scene. Zfat says that when she started her company in 2009 she didn't know of any investors to help start her site.

"You couldn't exactly walk up to a 50-something real estate tycoon and tell him you need $25,000 to jump-start your entertainment, fashion, and food blog. He wouldn't know what the hell you were talking about."

She says she didn't have the network or resources at the time, "so I built Poison Ivy myself - designed the template, implemented SEO keywords, and bought the graphic designer who lived in my building dinner to help me with a logo."

Still small, Poison Ivy now has 50,000 unique visitors per month, with a female audience between the ages of 10 and 24.

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While more female-run networks are emerging, there is a lack of access to informal networks where women can make important connections. "We don't have the equivalent to the golf game,” says Siegel. “And you know there's going to be business done there... There's no real equivalent that has been embedded yet.”

Lesa Mitchell says women are the nation's secret weapon for achieving sustained economic growth, and that lack of access to funds in not actually a gender issue.

Rather, she says, "it is an economic growth issue." According to research done by Babson College, if female entrepreneurs in the U.S. started with the same capital as male entrepreneurs, they would add 6 million jobs to the economy within 5 years — 2 million of those in the first year alone.

"There's a lot of women-backed companies out there that are all poised to grow if we had more support from everyone," Mitchell says.